1930 BTA LEXIS 2609">*2609 Certain amounts, representing salary earned, were credited to the petitioner during the taxable years on the books of a corporation, of which he was president. Another corporation, of which the petitioner was also president, executed and delivered to him during said years certain promissory notes for salary due, which notes then had no market value. The corporations kept their books by the accrual method, and the petitioner made his tax returns on the basis of cash receipts and disbursements. Held, that said amount so credited to the petitioner and said promissory notes do not constitute taxable income in excess of the aggregate amount actually paid to and received by the petitioner in cash in said years, since the unpaid balances were not available to him because of the financial condition of the corporations.
18 B.T.A. 650">*650 In this proceeding the petitioner seeks the redetermination of deficiencies in income tax for the calendar years 1922 and 1923 in the amounts of $1,071.69 and $484.50, respectively. The issue is 18 B.T.A. 650">*651 whether certain amounts in1930 BTA LEXIS 2609">*2610 excess of those actually paid to and received by the petitioner in cash during the taxable years on account of salary earned, which amounts were credited to the petitioner on the books of the corporation of which he was president, and certain promissory notes issued to the petitioner for salary due by another corporation of which he was also president, constitute taxable income.
FINDINGS OF FACT.
The petitioner is an individual, residing at Louisville, Ky., and during the taxable years 1922 and 1923 was president of the Kentucky Wagon Manufacturing Co., a corporation, hereinafter sometimes referred to as the Wagon Co.The Wagon Co. was engaged in the manufacture of wagons, trailers, and gaskins. The petitioner was to receive from the Wagon Co. during the taxable years a salary of $16,000 per year. The company kept a regular ledger account covering all monies paid to its president and for what they were paid. During 1922, the petitioner's account on the books of the company was credited with $15,998.92 for salary.
As president and chief executive officer of the Wagon Co., the petitioner was required to make numerous trips during the taxable years to Chicago, New York, Philadelphia, 1930 BTA LEXIS 2609">*2611 Dayton and other cities in its behalf. During 1922 the petitioner did not render an itemized expense account, but was given checks by the secretary and treasurer of the company to cover railroad fare and expenses on each trip. Under the system of bookkeeping in use by the company, each item was charged as expense on the petitioner's personal account, and the purpose for which the money was used was evidenced by vouchers.
During 1922 and 1923 the Wagon Co. was in a precarious financial condition. In order to provide funds for the operation of the company, the petitioner discounted his personal note at the bank for $50,000 and loaned the proceeds to the company. In 1922 the Wagon Co. repaid on said loan the amount of $15,261, including interest.
The petitioner received from the Wagon Co. at various times during 1922 cash in the total amount of $25,889.05. Of said amount $6,911.22 was for expenses incurred by the petitioner on behalf of the company; $15,261 represented the payment on the principal and interest of the note given by the petitioner to borrow money for the company; $716.83 was paid for personal items of the petitioner; and $3,000 was paid on his salary account. 1930 BTA LEXIS 2609">*2612 The petitioner received from the Wagon Co. during 1922 the aggregate amount of $3,716.83 on account of salary.
18 B.T.A. 650">*652 During 1923 the petitioner also incurred traveling expenses on behalf of the Wagon Co., and gave personal notes for its benefit. The expense items were charged to his ledger account, along with salary payments, and he was credited on the same account with a total amount of $21,894, including credits for salary in the total amount of $15,999.97, expenses turned in $4,989.86, a memorandum credit of $71, and a transfer out to the salary ledger of $18.94. The total amount withdrawn by the petitioner from the company in 1923 was $21,580.30, of which $6,910.90 was for expenses incurred in connection with the business of the company, and $7,500 represented payment on notes given by the petitioner for the benefit of the company. The petitioner received in cash during said year $7,169.40 on account of salary.
Bankruptcy proceedings were instituted against the Wagon Co. in 1921, which were avoided. Similar proceedings were again instituted in 1922, and the company finally went into bankruptcy in 1924. At that time the company owned the petitioner about $183,0001930 BTA LEXIS 2609">*2613 for money advanced to it. Beginning in 1921 and continuing through the taxable years, the Wagon Co. was operated by a creditors' committee, composed in part of outside bankers and in part of members of its board of directors.
In 1922 and 1923 efforts were made to consolidated the Wagon Co. with seven other corporations into an organization to be known as the National Motors Corporation. The creditors' committee worked with the petitioner to bring about the consolidation, but the consolidation was not successfully effected and the National Motors Corporation also went into bankruptcy.
On February 28, 1923, the Wagon Co. had a cash balance on hand of $143,960.49. At that time it owed the banks about $1,500,000, and owed approximately $500,000 additional in notes and open accounts. Many claims against the company were then in the hands of attorneys.
The petitioner owned 243 shares and controlled others in the Wagon Co., which had a total authorized capital stock of $1,500,000, with 14,184 shares outstanding. Petitioner was the largest individual stockholder in the company.
During the taxable years the petitioner was also president of the Ohio Refining Co., a corporation1930 BTA LEXIS 2609">*2614 having its principal office in Cincinnati, Ohio, hereinafter called the Refining Co. The petitioner's salary from the Refining Co. was $5,000 per year. On March 24, 1922, a 60-day note was given to the petitioner by the Refining Co. for salary, and on June 1, 1922, the note was renewed for 90 days. On September 20, 1922, $2,500 was paid on the note. On April 30, 1923, another note was given to the petitioner by the Refining Co. for $5,000 and on September 12, 1923, the company paid the balance 18 B.T.A. 650">*653 of $2,500 on the first note, leaving the $5,000 note given in 1923 outstanding. No other amount was paid to the petitioner by the Refining Co. for salary in either 1922 or 1923. The 1923 note was not paid until the Refining Co. was sold to the Louisiana Oil Corporation in 1926.
The Refining Co. was in bad financial condition during 1922 and 1923, was short of money needed to rum its business, and operated largely on credit. It was unable to pay its accounts and notes payable when due, and had to obtain frequent extensions. In 1922 it issued notes to its officers for salaries in the total amount of $20,000.
The notes given to the petitioner by the Refining Co. for salary1930 BTA LEXIS 2609">*2615 had no market value in either of the taxable years.
OPINION.
TRAMMELL: The issue in this proceeding involves, first, the application of the doctrine of constructive receipt of salary due the petitioner from the Wagon Co., which was credited to him on its books in the taxable years, and, second, whether the notes executed and delivered to the petitioner by the Refining Co. for salary in the same years constituted taxable income to him at their face value.
Concerning the doctrine of constructive receipt, we said, in :
This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona fide selection of this method by "construing" that to be received of which in truth he has not had the use and enjoyment.
Again, in 1930 BTA LEXIS 2609">*2616 , we said:
Before it should be held that a taxpayer constructively received income in any taxable year when he did not, in fact, come into possession of the money or property, it should appear beyond question that the taxpayer, although at liberty, considering the financial requirements and needs of the corporation, to withdraw the amount due him, deliberately chose not to draw or receive the amount owing by the corporation.
We think it is established by a clear preponderance of the evidence received of which in truth he has not had the use and enjoyment. the books of the Wagon Co. for salary in the taxable years were not constructively received by him and do not constitute income beyond the portions actually paid to him in cash in those years. The company was in a precarious financial condition, and was being operated largely with funds loaned to it by the petitioner. Bankruptcy proceedings were instituted against the company in 1921, again in 1922, 18 B.T.A. 650">*654 and it was finally forced into involuntary bankruptcy in 1924. Considering the financial requirements of the company and its general situation1930 BTA LEXIS 2609">*2617 in the taxable years, it can not, in our opinion, be fairly said that the amounts credited to the petitioner's account on its books for salary were within his control and disposition, or that he deliberately chose not to receive them. The action of the respondent on this point is reversed.
On the second point the action of the respondent must also be disapproved. It is a well settled rule that unsecured promissory notes received as compensation for personal services constitute income in the year received only to the extent of their fair market value. . See, also, ; ; .
The evidence here shows that during the taxable years, the Refining Co. was in a bad financial condition, operating its business largely on credit, and that the notes given by it to the petitioner for salary had no fair market value.
The petitioner consistently reported his income on the basis of cash receipts, and during 1922 received in cash, on account of salary due from the two corporations of which he was president, the1930 BTA LEXIS 2609">*2618 total amount of $6,216.83, consisting of $3,716.83 from the Wagon Co. and $2,500 from the Refining Co. In 1923 he received the aggregate amount of $9,669.40, consisting of $7,169.40 from the Wagon Co. and $2,500 from the Refining Co. The deficiencies involved should be recomputed by including in the petitioner's gross income only said amounts so received in the respective taxable years.
Judgment will be entered under Rule 50.